Booz Allen Hamilton Holding Corp (BAH) 2021 Q1 法說會逐字稿

Good morning. Thank you for standing by. And welcome to Booz Allen Hamilton's earnings call covering first quarter results for fiscal year 2021. (Operator Instructions)

I would now like to turn the call over to Mr. [Will Yates.]

Thank you. Good morning. And thank you for joining us for Booz Allen's First Quarter 2021 Earnings Announcement. We hope you've had an opportunity to read the press release that we issued earlier this morning. We have also provided presentation slides on our website and are now on Slide 2. I'm [Will Yates], and I'm Head of Investor Relations, and with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Lloyd Howell, Executive Vice President, Chief Financial Officer and Treasurer.

As shown on the disclaimer on Slide 3, please keep in mind that some of the items we will discuss this morning will include statements that may be considered forward-looking and therefore, are subject to known and unknown risks and uncertainties, which may cause our actual results in the future periods to differ materially from forecasted results. Those risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our company services and other factors discussed in today's earnings release and set forth under the forward-looking statements disclaimer included in our first quarter fiscal 2021 earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed on this call.

During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our first quarter fiscal year 2021 slides.

It's now my pleasure to turn the call over to our CEO, Horacio Rozanski. We are now on Slide 5.

Thank you, [Will], and welcome to the earnings calls. Good morning, everyone. Thanks for joining us.

I would like to start this morning in a somewhat unconventional way, but one that is very much in keeping with our culture at Booz Allen. At the start of every leadership meeting, we usually take a moment to focus on an aspect of our purpose and values. And today, we'd like to do the same here. Booz Allen's purpose is to empower people to change the world, to empower people to change the world. And to us, it's not a tagline. It's a statement that guides our thinking and our actions.

In recent weeks, prompted by the horrific killings of George Floyd, Breonna Taylor and Ahmaud Arbery, there has been a reckoning in our country about deep-seated racial inequity and a long overdue acknowledgment of the pain felt in the black community. Inside our firm, we have encouraged open, direct and, at times, very difficult conversations about racism and injustice. Thousands of us have participated in a virtual hands, many more joined team meetings and listening sessions and communicated with us through e-mails and one-on-one discussions with me and other senior leaders. Our colleagues have offered deeply personal stories, ideas, feedback, calls for action and a real passion for change. At a personal level, I have learned and I have grown through each interaction. I am deeply grateful for the honesty and the trust that people have extended to me. And as the leader of this firm, I am committed to doing more because when at Booz Allen, we say that black lives matter, we're not making a political statement, we're making a statement about our values.

In early June, our firm committed publicly to taking action along 6 dimensions. Our race and social equity agenda has both internal and external elements. The 6 points are as follows: number one, we will undertake an independent assessment of how our business practices affect people of color; second, we will intensify our efforts and accountability to increase representation of people of color at all levels; third, we have already increased personal time and space as well as resources for our employees' mental health; fourth, we're accelerating diversity and inclusion learning opportunities for all employees; fifth, we are making race and social justice a major element of our corporate philanthropy; and sixth, we've got on house a unique voice and unique capabilities, and combined with our talents, we will use them to advance social justice through work with our community partners.

What we heard from our people, what I heard from our people, is that they want Booz Allen to be a sustained catalyst for change. And with that in mind, we have crafted a comprehensive agenda that will endure and will evolve as we learn. It's not just the right thing to do and not just of this moment our purpose and values demand that we take action today and into the future.

Lloyd, you have been a leader in this effort, offering guidance and insights that have been crucial to shaping our agenda. I know you want to add your voice to this conversation, so let me turn the floor over to you.

Thanks, Horacio.

The past few months have been challenging for our country and our firm. July 18 marked 32 years since the day I joined Booz Allen. When I say this firm is my family, I mean it. And just like with all families, sometimes difficult conversations are needed. This is one of those times. I'm proud to be part of one of the most diverse leadership teams in corporate America today. Our Board of Directors is also much more diverse than most. This is clearly a firm that cares about people and about diversity and inclusion. But it is also clear that we have work to do inside Booz Allen and throughout society. Our race and social equity agenda acknowledges that. It says that to be a force for change in the world, we must start by ensuring that every person at our firm feels empowered, that those who have been marginalized in the past know they have a voice, a sit at the table and an opportunity to thrive.

I have experienced this firm as a place of opportunity, and I believe that it can be a force for good in the world. That's what redo me here all those years ago, called me back after a short stint on Wall Street and has kept me at our firm since. Furthermore, this is an issue all of our stakeholders care about, from employees and clients to strategic partners and investors. I look forward to the progress we can make together and to continuing the journey with you, Horacio, and the rest of my colleagues.

Thank you, Lloyd. I couldn't agree more, and thanks again for your leadership. Lloyd and I felt strongly that we needed to begin our earnings call on this topic because the outstanding performance that we discuss with you, our analysts and our investors, year after year, rests on the foundation of our people, our purpose and our passion.

Let's turn now to said business performance. As you saw in the press release, we had another excellent first quarter. The business is operating well and we continue to support our clients, invest in our people, and manage through the complexity of the COVID-19 pandemic. Despite all the things that are different and more challenging than in a typical year, our team has delivered another strong start. Our people continue to demonstrate their value to clients, missions and this institution in these truly unprecedented times. It is my highest priority, shared by every member of the Board and the leadership team, to make them feel supported and to endeavor to keep them safe as they do their critical work.

Three months into the fiscal year, our financial results align with our expectations for the full year. Across all the key metrics, we are pleased with our performance. You'll recall from our May earnings call that we forecast a strong first half and a more uncertain second half. At this point, the unknowns in the back half of the year remain. First, we do not know how the pandemic will progress or affect our people, clients and business over the full fiscal year. Second, it is still too early to tell how the federal appropriations process will play out this fall. And third, it is unclear what budget-related impact November's election may have. Yet despite these unknowns, we are affirming our guidance for the fiscal year and we are looking for opportunities to use our strong balance sheet as a strategic asset.

Turning now to the pandemic and Booz Allen's response. As we've said before, we see it evolving in 3 phases. The first phase, emergency response, was from late January through April. Now and for most of the fiscal year, we expect to be in Phase 2, the period when the virus is still circulating and there's no proven treatment or vaccine. We continue to emphasize telework with more than 80% of our billable work being done remotely. And we have collaborated closely with clients to put hundreds of safe return plans in place for those whose work requires them to be at a facility. Also, we're pleased that a significant portion of the $100 million we set aside in response to the pandemic remain available. Throughout the year, we will continue supporting our people and investing in health and safety programs.

During the first quarter, our leaders executed the business well, recruiting and hiring talent, managing contracts, winning new opportunities, developing our capabilities and making progress on our option value portfolio. Our defense and civil markets, representing 3/4 of our business, continue to deliver robust growth. The intelligence market has been more affected by the pandemic, but it's showing positive signs in terms of our recruiting and opportunity pipeline. And in global commercial, we continue to see strength in our cyber-oriented work. Across all markets, we are positioned at the intersection of mission and technology where demand is robust. Our book-to-bill ratio was a first quarter record, and we are especially excited about the content and quality of the work.

Significant awards across the portfolio show that we've invested in the right capabilities to support our government as it scales new technologies into mission. For example, under a nearly $1 billion recompete win, we will help the Army expand use of virtual reality and artificial intelligence tools in critical learning. The program called Emergent Threat Training and Readiness Capability, or ET2RC, is delivered at bases worldwide. We are extremely proud of this work because it helps protect forward-deployed soldiers from emerging threats.

A second example is our work at the Joint Artificial Intelligence Center, or JAIC, where we are helping to source and integrate the best AI technologies into priority DoD missions. The contract announced in May is about operationalizing AI at scale and represents our biggest, most strategic win to date, spanning a portfolio of about 70 AI projects across multiple federal agencies.

And finally, I'll mention a significant digital transformation win at the IRS. Under a contract called Enterprise Case Management Solution Integrator Services, we are building an enterprise-wide case management platform that will help modernize IRS systems, reduce costs, improve efficiency and vastly improve service to taxpayers. These programs and many other opportunities in our pipelines will continue to show Booz Allen as a premier provider of mission-critical technologies to federal agencies.

Even as we continue to execute our business exceptionally well, our leadership team is positioned for the future. We intend to take all that we have learned during Vision 2020 and throughout this pandemic and apply it going forward. Through our innovation agenda, we continue to develop core and option value technologies that we know clients need to advance their mission. We're strengthening our IT infrastructure, including modernization of our financial systems. These technology investments support telework, create efficiencies, enable growth and prepare us for emerging business needs. We're also preparing for increased volatility in the economy, financial markets and budget outlook. We have spoken about those in terms of challenges, but they also present opportunities. We're actively scanning and plan to be aggressive in deploying capital at the right time to maximize value for our firm and our shareholders.

In sum, from a position of strength, we are laying the groundwork for continued growth and market leadership. This approach has been the key to our institution's success for more than a century. We believe it is also the core of our value proposition to investors today.

And with that, Lloyd, over to you for a more in-depth look at our first quarter results.

Thanks, Horacio. I'm tremendously proud not only of our performance in the first quarter, but also of the dedication and determination exhibited by our people. Their commitment to our firm, their colleagues and our clients' mission is unwavering. They have risen to the challenge of operating in an unprecedented environment, and our very strong start to fiscal year 2021 gives us confidence that we can meet our goals for the full year.

We are now in the final year of our 3-year investment thesis and remain committed to maximizing shareholder value in both the near and long term. Our first quarter results maintain our consistent record of strong financial performance. Additionally, we continued to grow our headcount and had a record first quarter book-to-bill, positioning us well for the full year. We continue to invest in our people, capabilities and technology, preparing Booz Allen for fiscal year 2022 and beyond. And we have the balance sheet strength to take advantage of potential future market volatility while augmenting our operating performance with opportunistic capital deployment.

I'll now cover our first quarter results. Please turn to Slide 6. Starting at the top line, revenue and revenue, excluding billable expenses, increased 7.2% and 10.5%, respectively, compared to the same quarter last year. Growth continues to be fueled by strong demand for our services and solutions, particularly in our defense and civil businesses, and an increase in headcount to meet that demand. It also reflects our success first in transitioning most of our work to remote delivery, and now we're required and see a portion of it back on to Booz Allen for client sites.

Revenue growth this quarter was impacted by lower-than-typical billable expenses primarily due to COVID-19. We anticipate continued volatility in billable expenses because the timing and magnitude of things like travel, equipment purchases, subcontractors and other direct costs remain uncertain. However, as we have said in the past, revenue, excluding billable expenses, is where we generate most of our profit and, therefore, is the metric we focus on internally.

Turning to Slide 7. Our book-to-bill was 2.2x, a first quarter record. Our trailing 12-month figure is now 1.4x revenue. We continue to augment our traditional foundation of diversified small awards by pursuing larger and more complex bids that, by their nature, cause quarter-to-quarter volatility in book-to-bill. As a case in point, during our first quarter, we booked several large awards, including those Horacio mentioned, which helped increase total backlog by 16% to a record high $23 billion. Funded backlog was up 8% to $3.4 billion, unfunded backlog grew 9% to $4.7 billion and priced options rose 21% to $14.8 billion. To date, COVID-19 has not slowed down the award environment. This is a credit to our clients and contracting officers as they continue to issue request for proposals and awards in a remote work setting.

Pivoting to headcount. As of June 30, we had 27,381 employees, up 997 year-over-year or 3.8%. For the quarter, we added 208 employees. We have adapted well to remote hiring, and our headcount continues to be buoyed by lower-than-typical attrition, which we attribute, in part, to the pandemic resilience program we put in place on April 1. For the year, we remain in a growth posture and intend to increase headcount to meet sustained demand.

Moving to the bottom line. Adjusted EBITDA for the first quarter was $213 million, up 7% year-over-year. On our last call, we estimated that our inability to bill for fee on shift work performed in our defense and intelligence markets would create a negative impact of approximately $6 million per month. The actual impact for the first quarter was about $12 million. After accounting for this impact, our increase in adjusted EBITDA was driven by top line growth, strong contract level performance and effective cost management.

First quarter adjusted EBITDA margin was 10.9%, the same as the first quarter last year. Two factors were at play. Lower-than-expected billable expenses improved adjusted EBITDA margin on revenue, but this was more than offset by unbilled fee in our defense and intelligence market. The impact to earnings and margin going forward will depend mainly on the pace at which this work continues to fully transition back on site and whether any modifications are made to the CARES Act due to expire after September 30. As noted previously, the potential that this fee will not be recovered is reflected in our guidance range.

First quarter net income and adjusted net income grew 10% year-over-year to $129.3 million and $129.9 million, respectively. Diluted earnings per share rose 11% to $0.92 while adjusted diluted earnings per share increased 12% to $0.93. These increases were primarily due to our revenue growth, decreased interest expense, a lower tax rate and reduced share count due to our share repurchase program.

Turning to cash. We generated $140 million in operating cash during the first quarter, an increase of 175% over the prior year. Cash ended the quarter at $621 million. This strength in cash flow was primarily due to our effective working capital management and lower interest expense. COVID-19 has not materially impacted cash collections as the virtual invoicing process continues to run smoothly. Capital expenditures for the quarter were $20 million. This reflects a shift away from facilities' investments towards technology and tools needed to support the virtual work environment. Additionally, we continue to modernize our corporate IT infrastructure. As Horacio mentioned, we are approaching the implementation of a next-generation financial system capable of supporting us through a period of dynamic future growth.

Please turn to Slide 8. Our robust operating performance and prudent capital management have resulted in a strong, well-capitalized balance sheet. During the first quarter, we continued to execute a disciplined, value-enhancing capital allocation strategy. In the quarter, we repurchased $76 million worth of shares at an average price of $72 per share. Including dividends, we returned a total of $119 million to shareholders during the quarter. We continue to see the strength of our balance sheet as a source of strategic advantage, particularly as we enter a period of potential uncertainty for our industry and for the broader economy.

In times of volatility, well-capitalized firms, such as ours, can create incremental value through opportunistic acquisitions or timely return of capital to shareholders. In our investment thesis, we set a $1.4 billion deployment target over the 3-year period ending this fiscal year. This remains our objective. And while we anticipate being more aggressive in deploying capital towards attractive opportunities, we will not artificially bias our deployment strategy to meet this objective. We will remain disciplined as we maximize opportunities for our firm and our shareholders. Lastly, today, we are announcing that the company has authorized a quarterly dividend of $0.31 per share payable on August 28 to stockholders of record on August 14.

Before opening the line for questions, I'll briefly touch on our view of the rest of the year and our guidance. Please move to Slide 9. With 1 quarter behind us, our guidance remains unchanged. We continue to expect revenue growth between 6% and 10%, adjusted EBITDA margin of approximately 10% and adjusted diluted earnings per share between $3.40 and $3.60. The ADEPS guidance is based on 136 million to 140 million weighted average shares outstanding and a tax rate in the range of 20% to 23%. We are forecasting operating cash to be between $550 million and $600 million and capital expenditures to be between $80 million and $100 million.

As expected, we had an excellent start to the year, and our strong first quarter sets us up well for the second half. The uncertainties we face are industry-wide concerns. We expect to manage through any turbulence well as we have in the past, and we'll be looking for strategic opportunities to unharness the significant potential of our balance sheet.

In closing, we are extremely proud of our first quarter and continue to work towards realizing the 3-year goals captured in our investment thesis. Our firm looks forward to maintaining its record as an industry leader this year and beyond.

With that, [Will], let's open the lines for questions.

Thank you, Lloyd. Operator, please open the line.

(Operator Instructions) Our first question comes from Sheila Kahyaoglu from Jefferies.

Horacio or Lloyd, I know it's only been 2 months since your last earnings call, but I just wanted to touch upon how you're seeing the government react to COVID in this Phase 2, which seems, as you had mentioned, will go on for some time, whether it's their thought process on the demand environment and how that's changing or how to operate in a more virtual environment and the opportunities for you, of course.

Sheila, it's Horacio. Why don't I start, and I'm sure Lloyd will want to add.

Let me first acknowledge the hardships that the pandemic is causing on people, on our clients, really, on the entire country. I've been in discussions with several senior clients, and I've been impressed by how thoughtful and how focused they are. They are thinking about the total force, meaning their people and our people together, and we're working in partnership through the safe return process. Our goals, as you know, are to protect the health and safety of our people, to serve our clients and to maintain our financial strength and resilience. And thanks to all of these combined efforts by the government and by Booz Allen, we're operating at pre-pandemic levels essentially. You look at the demand environment, it continues to be very strong. You saw it in our book-to-bill. We have a very healthy pipeline. Our clients, we don't see -- in some pockets, things might be moving to the right a little bit. But by and large, the demand environment continues to be very strong and clients are eased -- anything, any -- even more focused on bringing technology to bear to tackle these issues. They have moved to telework, just like we have. We're talking about remote delivery for the long run. And this has also unearthed some needs in their networks, in their systems, for cybersecurity, for cloud, for a number of things. So all in all, I think we're going to continue to see this kind of focus on this kind of thing going forward.

Sheila, I would just add a couple more points. On the demand side, we've seen about $20 million in new contract awards in Modzy, the existing contracts that are COVID related. We've got about $30 million in COVID-related opportunities that we're pursuing.

As you heard in our prepared remarks, on our recruiting front, albeit the volume lower than we had hoped going into the pandemic, we're winning. We're winning the war on talent. We're able to source, recruit and on board and deploy our people. And I think we're getting better and better at that. The payment offices are operating well. They are paying on invoices. So I think the government has responded well to the pandemic, and we've kept pace with them.

Sure. And then maybe as a follow-up. Just on your last point, as well as you guys mentioned in the opening remarks, it's very clear, you care about your people. And just thinking about hiring and consulting headcount grew 4% in a very tough virtual environment, that's actually in line with your 2-year average. So pretty good, all things considered. Just wanted to see what you're seeing in terms of hiring and attrition.

I'll start. The -- on the hiring front, I think everyone, the labor market as well as ourselves, had to adjust. Though we had done a modest amount pre-pandemic, it really went full bore in the midst of it. And I would say the candidates have acclimated wealth as our hiring managers and our recruiting team.

If there's any challenges, we value our culture so much. So now that we've added 4% to our workforce, we have colleagues now that haven't physically touched other colleagues. So we're working through how to have virtual social hours, things of that sort to maintain that. But I'd say the machinery is working well and we remain optimistic of keeping pace throughout the year.

The only thing I will add to that is just to say that all the work that we've done, both on our social justice agenda and before that on pandemic response, I think, as if anything, strengthened our value proposition both inside Booz Allen and our brand as an employer. So we have reason to believe that we will continue to see the level of success going forward.

Our next question comes from Jon Raviv from Citi.

(inaudible) calling on for Jon. You spent a lot of time in the prepared remarks talking about balance sheet and the ability to take advantage of market volatility. Just shed a little bit more color on where you're standing, what sort of capabilities you might look to add, and then also a little bit of color on sort of size that you see yourselves in versus what you're looking at.

Why don't I start and I'm sure, again, Lloyd will want to add. As you pointed out, we were looking at opportunities in the market very assertively. Our balance sheet is very strong. Our strategy is now clearly and in focus. And so we know what we're looking for. It's mostly tuck-ins that allow us to bring in unique technologies and unique positions to clients that accelerate our growth. The pipeline is beginning to build nicely after some fits and starts at the beginning of the pandemic. And we intend to scan things assertively. We're not going to deviate from the level of discipline we normally bring, but we are prepared to take advantage of volatility in asset prices and ensure that we are capturing what we need.

Jon, not much more to add. We're, as Horacio said, continuing to look at options to maximize value for our shareholders in the near, mid and long term. And certainly, capability tuck-ins are part of that. So we look at over 100 opportunities every year. We're on pace to do that this fiscal year, albeit the environment is pretty uncertain. But our deployments and our use of the balance sheet is certainly we see as a strength.

Got it. Appreciate the color. And if you could just -- a little bit more color on that. In terms of your ability to integrate and subcontract AI versus develop it indigenously, is it something within your portfolio now that you could develop? Or if you feel that you need to add further capabilities to kind of create your own AI solutions for customers?

I think we look at AI as a broad enterprise of products, services, technologies and people. And we're -- our work is to make sure that AI scales through the federal government and creates real value. It's clear in demonstration projects and in the lab that this technology offers great promise. But as you know, going from the lab to the field and the scaling process is a major challenge, which we're trying to accelerate. We do that through our own people and capabilities. We do that by investing in option value like Modzy. We do that by building partnerships like our unique partnership with NVIDIA and so forth. And we will continue down this path to ensure that Booz Allen is the one company that can really help the government scale these technologies. We're very excited about our work with the JAIC. We're very excited about the over 70 programs that we have going on right now, and we see this as a growth area well into the future.

Our next question comes from Carter Copeland from Melius Research.

I hope you're all well. Horacio, I had two questions for you. One, when you look at ET2R -- E2T -- ET2RC and the JAIC, can you give us any sense of, as part of that broader AI effort, what those kind of represented of your kind of near-term pipeline when you think about what you wanted to go capture and the success you had there relative to what the opportunities may be?

And then, secondly, on 2 of your option value investments, both District Defend and Rec.gov, just in the context of what I would assume is a very high demand background for those sorts of capabilities and offerings right now, how that changes or informs your investment case on those.

Sure. You throw a lot at me, Carter. So if I don't answer any part of it, just come back and reask it. But let me start with AI. ET2RC is a program that is -- it's a recompete win of a program that used to be called Global Threat Mitigation Program. It was actually the first $1 billion win at Booz Allen. So it was significant because of that, but it was also significant because of the work -- the underlying work. And the underlying work is to protect troops in the battlefield from emerging threats originally about IDs, and now that has grown to a broader range of threats.

And so what we're using is AI and virtual learning and a number of technologies to make sure that our clients can, in fact, move faster down deploying training, sometimes on range on many places and especially in this environment very fast. The JAIC win, we've talked about before. There's other things in the pipeline that make me very optimistic that, again, we are getting traction on artificial intelligence as a premier provider. It's core to our strategy, not just AI, but being the company that brings these new technologies to bear in the federal government in a way that are implementable into the mission. So whether it's that, whether it's cloud adoption in a different way, we want to be that catalyst for technological change inside the government. And our clients are giving us that opportunity. And again, I see more of that in the future.

With regards to the option value portfolio, it continues to progress nicely. You can imagine that Rec.gov itself gave us some concern earlier in the year because it's primarily a site around the national parks. And we weren't sure it's tourism related and the tourism industry has been hit very high. But in fact, people have turned to the national parks quite a bit. And so we are seeing good momentum there better than we anticipated.

Going into the year, District, we continue to develop the technology and there's increased interest in it because it allows for safer remote delivery, say, for telework. But also Modzy, in the context of all of the AI wins and our directed energy initiative, is also progressing very nicely. So I think all in all, I would leave you with our strategy is working. We remain in a growth posture. And everything we're doing plus, hopefully, some opportunities that get created by our balance sheet make me optimistic about where we're going.

Our next question comes from Edward Caso from Wells Fargo.

Congrats on another solid quarter. I was trying to get a little bit more details on your exposure to the intelligence community. You said it was about 25% of revenue. I was curious how much of the revenue is being covered now by Section 3610, either -- others have said 8% to 12% of hours. Can you provide some kind of number like that?

Ed, it would be difficult for us to do that. The impact that we're seeing, as we mentioned in the last call, really, it's been around fee. And to that extent, we had expected it to be $6 million per month. In actuality, it's been a little bit less than that large part because the clients have allowed for telework approvals. We expect that will continue to evolve the longer we get into the year. But that's the most significant impact we're seeing as it relates to our national security work.

My other question is on the ability to hire. I think I heard your comments say that you had started virtual hiring, but you're now ramping it up. Other companies have said that they've been doing it before. They seemed like it was a natural flow. So I don't know if you're a little behind the competition on hiring through this new model. And also, given the work that you do, assume a higher percentage of clearances are required, is there any sort of friction in the clearance process that slowed your ability to hire and deploy?

Sure. On the virtual point, we've always had that as a component of our recruiting. It obviously now is a larger component to the recruiting since we're all in a virtual world. So we're not seeing that we're behind at all. In fact, for the type of talent that we've been sourcing and pursuing, we're very pleased with our performance up to this point. As it relates to the care community, that's always a challenging set of candidates. I would say it remains so even in this environment.

That being said, the government is still conducting background investigations and on par with the usual timing, even we're -- given the situation we're in. So that's always going to remain a headwind, particularly for certain levels of classification, but the overall recruiting performance, we're very pleased with the results to date.

Our next question comes from Cai von Rumohr from Cowen.

Yes. So terrific Q2 book, terrific first quarter bookings. Was any of that vigor reflective of slips from the fourth quarter or pull forwards from the second quarter? And given that the second quarter is usually your strongest, I think you do about 2x, should we still look for the second quarter to be very, very strong? Or does this quarter steal some of that?

Yes. Thank you for that, Cai. Let's look at our bookings in 2 parts. First one on tactical sales dimension, we are on par, on pace in that category. So we are winning work that we expected, both in terms of recompetes as well as new work, and that's one contribution to our outstanding performance in Q1. The other part, as we have said previously, is we are pursuing larger opportunities. And it's going to introduce volatility because the timing of which is a little bit less certain. Several of those, as Horacio highlighted in his opening comments, came to fruition. Whether it was going to be Q2 or Q1, only the government can decide, but they stayed true to their timing of award, and we were very pleased to win.

As it relates to Q2, as you know, it coincides with the end of the government's fiscal year. We're in the midst of a heavy procurement season. We are performing well and we would expect that we'd be on par with our usual cyclicality of our bookings when we get to Q2.

Terrific. And then on the issue of M&A, one of your competitors made the point that they wouldn't do any deals in the current environment because it's extremely difficult to do adequate due diligence on a virtual basis. Do you feel the same? And would you do any deals before kind of COVID is behind us?

Cai, I'll start. I don't think we feel the same way. We are known to be conservative and disciplined in our approach. We are going to be conservative and disciplined in our approach, but we have transitioned to virtual work I think better than most. And that's not just in our service of clients, it's in the way we work internally. And so I feel that if the opportunity presented itself, we would not pass or delay it because we are in the middle of a pandemic.

Our next question comes from the line of Gavin Parsons from Goldman Sachs.

Just wanted to touch on margins a little bit. I mean lowest fixed price/mix in a long time, a lot of COVID impact. Obviously, you mentioned some of the pieces that helped. But I just wanted to kind of ask higher level, is there a natural margin ceiling? Or how much further can you expand? And in the quarter, specifically, did you turn off any investment or R&D just because of uncertainty? But it doesn't sound like it.

Yes. We are very pleased with margin performance despite the unprecedented operating environment. You may recall, we believe we've gotten here through a lot of operational excellence, executing the business well. Our business leaders are sensitive and cognizant of not only the top line, but the bottom line when it comes to job profitability. And so all of that, we believe, has contributed to our performance to date. We are going to continue to operate the business well. As we forecasted for the year, we expect to end around approximately 10%. It's a normal rhythm to our business where the seasonal spending in the second half is higher, and we have a bit of a dip in billability in the second half. But beyond that, we're on pace to land where we expected and how we forecasted.

We have not done anything unusual to the business as it relates to not investing. As we said at our year-end close, we're investing in our people. We're going to continue to do that. And the normal rhythm of our business is as the business produces opportunities to invest in, we consider it closely and we pull the trigger if it has merit, but that's no different than any other year that we're working through. So at the end of the day, it really has been the operational excellence and execution by our business leaders.

Got it. That's helpful. And then as a hypothetical, obviously, it's difficult to forecast the longer-term trajectory of the budget with all the uncertainty that we have today and the fiscal deficit and the election. But if you take a look at the last budget downturn where obviously you guys outperformed the end market, it does seem like your end market was more impacted than the kind of broader defense or government budget on average. So I'm just curious if we have a budget downturn going forward, whether or not you think today, that kind of the government IT end market might be relatively less impacted than, say, it was last time during a budget downturn.

I guess I'll try and take that. I'll say first that my crystal ball is a little cloudy this morning. But I'll answer the following. We remain in a growth posture. What I believe is that there's opportunity to continue to help our clients make this transformation towards digital and towards these new technologies. And that if anything, in a tight budget, those are going to become more important because of the efficiencies that they create. And so we're well positioned, I believe, as a company to capture upside from effectiveness, but also capture upside from efficiency as we help our clients make this transition. And that's why, to your earlier question, Lloyd said what we said, which is we continue to invest in our business and in our people, and we're going to drive forward. Our goal is always to outpace the end market, and we've been doing that for a long time through ups and downs, and we intend to do the same.

I show our next question comes from Matt Akers from Barclays.

I was wondering if you could touch on the impact from the CARES Act lost fee work, how that sort of trended as you move through the quarter and into July. And also how fast kind of over the same period people might be able to return to some of the locations that they may not have been able to access.

Sure. We had expected that a significant impact would be international security accounts largely around the inability to invoice for a fee. And we estimated at the time about a $6 million per month headwind. The reality is it came in a little bit less than that in large part because our clients were approving of us to support them with telework. We also had shifted, as did many in the sector, to a shift work arrangement to continue to support those critical missions.

Like Horacio's crystal ball, mine is equally cloudy as to how long or at what rate the government will make adjustments, but we are in heavy discussions with our clients. And as with any uncertainty involving the virus, we just need to remain agile. At the end of the day, we've built in this to our forecast, and we still expect to finish at approximately 10% on margin by the end of the year.

But as it relates to the CARES Act, that's been the impact up to this point. As we said in our prepared remarks, we're going to come up on the September 30, and we'll see what adjustments at that time the government makes or not.

Great. And then I guess one other. I think last quarter, you had mentioned maybe paid time off as maybe a variable kind of in the later part of the year. If I look at kind of your productivity, just like revenue per employee in the quarter, it looks like it was pretty strong. So I guess could you just kind of touch on how your employees are kind of managing, why they were so productive in the quarter? And if that maybe could be a little bit of a headwind as we move throughout the year?

Sure. I'll start, and I'm sure Horacio will want to jump in. Our employees have been great. You want to talk about seamless transition to a virtual environment not losing much of anything around productivity, everyone's been running 100-plus percent since March. And I think from a numerical standpoint, you see what results that was able to yield. At the same time, everyone runs the risk of a burnout. And so we have been encouraging our people to take care of themselves physically, mentally. It's part of our constant communication with our folks and through our leaders, and we've seen a modest uptick in people beginning to take PTO. We actually see people come back recharged. That will continue to be our messaging. As Horacio said, the $100 million resiliency fund is in place, and we fully intend to take advantage of that on the benefit of our employees. But everyone has been extremely productive, but now we're shifting to making sure that everyone is taking care of themselves at the same time.

I don't have much to add other than echoing Lloyd's shout-out to our people, especially -- this has been hard on people without a doubt. And especially young families, people who are taking care of elderly relatives and yet, they have not skipped a beat. They're working hard. We're looking for ways to support them into the fall. We're being as creative, as innovative as we possibly can. And our team has responded really well to the fact that we're in it together.

I show our next question comes from Joseph DeNardi from Stifel.

Lloyd, I think this is for you. When you look across your 3 government customers, defense, intel and civil, can you just talk about how you look at your market share within each 1 of those customers? And then what a realistic market share is 5 or 8 years from now, just in the context of if we do see kind of a tougher budget environment, your ability to grow just from continuing to gain share?

Yes, Joe, it's a great question, but it's a challenge to answer because the metrics by which you would traditionally look at share are a bit reverted as we kind of see opportunities and pursue. So case in point, the government now is bundling more and more different capabilities, albeit within a market. And so if you try to define in terms of capabilities, it's not exact. And then, frankly, internally, it's not a metric that our business leaders are focused on. By proxy, our win rates are at the same level as we exited FY '20.

For recompetes, we're winning at 90%. For new work, slightly over 60%. And simply put, if we're winning, someone's losing. So I like the fact that our win rates are sustaining. We have traditionally outpaced the market from an organic growth perspective. We're off to a great start, but I'd struggle today to break it down in terms of share percentage just given how the calculation would be a bit cloudy.

Yes. I think the only thing I will add is the last time we looked at this, we're essentially single-digit market share across all of our primary end markets. And so I don't think we are capped. And if anything, the expansion of work that we're doing around capabilities, around option value and so forth, I think opens up new available markets to us. So I believe this notion that we're in a growth posture needs to be with us and that we're going to invest in this business through the upturns, but also through the downturns in the overall budget picture is I think what's going to make Booz Allen continue to succeed over time.

That's helpful. And then, Horacio, you mentioned earlier that the kind of the value proposition of IT modernization should become more compelling to your customer in a more constrained budget environment. Can you just talk about the level of confidence you have that the customer will actually recognize that and kind of act rationally from a budget standpoint? Because I'm not sure that historically, that's always been the case, whether you think budget management and spending where investments are actually more appropriate will be different going forward than it has in the past.

Sure. I will tell you, over the last decade, maybe as a result of the increased challenges in terms of budgets in Congress and all of that, our end clients have become more sophisticated about how they prioritize and how they manage than they used to be. When sequestration came online, if you want to go all the way back there, our clients started in the way that, frankly, many companies start with these discussions, which is cuts across the board and so forth, but very quickly move to prioritizing what was most needed, what was most important and then cutting some things that were less important more deeply. I think that is now a skill set that's in the muscle memory of the -- especially the larger federal agencies that we serve. And so I would expect that, that will be the approach.

And again, I'll say, if I take that from a Booz Allen lens, first of all, I think we have a broad range of technology capabilities that will help them do that. And then, secondly, the combination that were so broad across the government and that our single P&L business model actually allows us to flex quickly is what I think gives me some level of confidence that should there be a change in the budget posture, we will weather that well.

This concludes our Q&A session. At this time, I'd like to turn the call over to Horacio Rozanski, President and CEO, for closing remarks.

Thank you very much, and thanks, everyone, for your time and for your questions this morning. As always, Lloyd and I are proud to represent the people of Booz Allen as another fiscal year gets underway. It's our people's skills, our -- their passion, their values that power our firm quarter-after-quarter and year-after-year. And because of them, I'll say it again, we look to the future with confidence. So until next time, I hope your families stay safe and remain healthy. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.